True Value 2008 Annual Report Download - page 22

management’s discussion and analysis
of financial condition and results of operation
2008 FINAN CIA L REP OR T :: 1
OVERVIEW
In 2008, True Value Company (“True Value”) had a stable year,
given the U.S. economic recession. While Net revenue was off
slightly, True Value maintained its 2007 profit performance and
patronage dividend. True Value’s launch of Destination True
Value (“DTV”) exceeded expectations. For the first time in over
a decade, revenue from new stores exceeded lost revenue from
terminated stores. The primary driver of this new store revenue
was the rollout of DTV.
DTV was launched at the fall market in October 2007 and is True
Value’s first complete retail store model. It encompasses not only
interior and exterior signage and décor, but complete merchan-
dise assortments for small, medium and large format stores. DTV
provides the membership with very clear direction for an updated,
on-trend, relevant, and both male- and female-friendly hard-
ware store. DTV is True Value’s growth platform for the future.
This strategy was designed to reverse member attrition and to
increase the productive retail space of member stores. Manage-
ment launched the multi-year retail growth program with financial
incentives for opening additional stores, or expansion or remod-
eling of existing stores. These financial incentives obligate the
applicable members to adhere to certain retail standards, includ-
ing minimum retail square footage per store.
In 2006 and 2008, Net margin was skewed by several unusual
or nonrecurring items. In 2006, True Value recorded $5,745 in
reductions to arbitration and legal reserves, primarily due to
changes related to the E&Y matter (see Note 8, “Commitments
and Contingencies – Claims Against Ernst & Young LLP,” to the
Consolidated Financial Statements), and $4,166 in one-time net
gains from changes in various employee benefit plans, primarily
the freezing of the qualified pension plan (see Note 11, “Ben-
efit Plans” to the Consolidated Financial Statements). In 2008,
True Value recorded $3,007 in additional arbitration benefits
related to the E&Y matter. The following illustrates Net margin
results for the last three years, as reported, and excluding the
above unusual items.
Net Margin ($ in millions)
After accounting for the net impact of the unusual or nonrecur-
ring items, Net margin has been fairly consistent over the last
three years. Management expects a modest decline in 2009 Net
margin due to additional investments in the business and the
continued impact of the U.S. economic recession.
Management utilizes a variety of key performance measures to
monitor the financial health and performance of True Value’s
business. These measures are comparable store product sales
to members (“Comp Store Sales”) and net member attrition (two
drivers of Net revenue), gross margin percentage, operational/
interest expense and debt levels.
Net Revenue ($ in millions)
% Change in Comp Store Product Sales
% Revenue Increase/(Decrease)
From Net Member Attrition
In each of the three years prior to 2008, True Value had an increase
in Comp Store Sales and a decline in Revenue from net member
attrition. In 2008, True Value experienced a reversal of this trend.
Comp Store Sales decreased, while Revenue from new stores
$80.0
$60.0
$40.0
2006 2007 2008
$72.8
$64.0 $64.2
$61.2
$62.9 $63.8
As Reported Excluding Unusual or Nonrecurring Items
2005 2006 2007 2008
$1,975
$2,000
$2,025
$2,050 $2,043 $2,050
$2,041
$2,013
2005 2006 2007 2008
0%
-1.0%
-2.0%
-3.0%
1.0%
2.0%
3.0%
2.2%
1.6%
1.1%
-2.1%
2005 2006 2007 2008
0%
-1.0%
-2.0%
1.0%
-1.0% -1.0% -1.2%
0.1%
($ in thousands)